I bought my house 13 years ago thinking it would be a starter home. Well, here I am, 13 years later, and what I thought was my starter home may be my forever home. Plans change in life.
If you bought your starter home with an Adjustable-Rate Mortgage (ARM) thinking that you would only be there for a few years, but you are now settled into the neighborhood, your kids love the schools, your commute couldn’t get any better, or any number of other number of reasons, you may want to consider refinancing your adjustable-rate loan to a fixed-rate loan. Fixed-rate loans eliminate the future risk of higher rates when your ARM’s introductory rate period expires and your loan adjusts to the current market.
In contrast to this situation, let’s say either your job is transferring you in a few years or you had your first baby and can’t imagine life without four or five more kids, so you know that you are moving in a few years. A great way to help save for your next home purchase in a few years is to refinance to a lower-rate adjustable loan to take advantage of a new, lower payment and bank the savings that you’ve earned by switching from to an ARM. This way, you have some additional funds when you are ready to move.
Another great time to take advantage of an adjustable rate loan is when you are making major renovations to your home. With an ARM, you can leverage the cash in your home, maybe with a first and second loan to tap as much equity as possible. Take a short-term adjustable-rate loan, and then when the value is higher (after the renovations are complete) switch to a fixed-rate loan to roll the loans together if you plan to be in the home long term.
In conclusion, the best time to refinance into a fixed or adjustable-rate mortgage largely depends on your future plans. If you do not plan to remain in your mortgage for very long, an ARM is probably the best option for you. On the other hand, if your original starter home has become your forever home, a refinance into a fixed-rate loan will provide stability and protection from rising rates in the future. Finally, if you are making renovations to your home, an adjustable-rate loan will help you tap into equity to pay for the renovations, then the resulting increase in value will help you achieve a lower fixed-rate mortgage when you roll the loans together in the future.
Want to learn more about when to refinance? Check out our guide, Fixed-Rate or Adjustable? 5 Questions to Help You Decide, and contact Apex with any other questions that you might have.